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Share-Based Compensation
 12 Months Ended
Jan. 26, 2020
Share-based Payment Arrangement, Noncash Expense [Abstract]  
Stock-Based Compensation Share-Based Compensation
Financial Statement Effects and Presentation
Pre-tax share-based compensation was included in the Statements of Income for fiscal years 2020, 2019 and 2018 as follows: 
 
Fiscal Year Ended
(in thousands)
January 26, 2020
 
January 27, 2019
 
January 28, 2018
Net sales offset (Warrant)
$
—

 
$
21,501

 
$
16,219

Cost of sales
1,928

 
1,639

 
1,477

Selling, general and administrative
38,556

 
35,430

 
24,266

Product development and engineering
11,565

 
8,267

 
8,089

Share-based compensation
$
52,049

 
$
66,837

 
$
50,051

Net change in share-based compensation capitalized into inventory
$
—

 
$
—

 
$
(414
)

Stock Options
In prior years, the Company has granted non-qualified stock options to both employees and non-employee directors. The fair value of these grants were measured on the grant date and recognized as expense over the requisite vesting period (typically 3-4 years). The Company uses the Black-Scholes pricing model to value stock options, and the weighted-average grant date fair values of awards granted in fiscal years 2019 and 2018 were $14.53 and $10.70, respectively. The number of shares authorized per the equity incentive plan is 17,031,653, and the maximum contractual term of equity share options is ten years.
The following table summarizes the activity for stock options for fiscal year 2020:
(in thousands, except per share data)
Number
of
Shares
 
Weighted-
Average
Exercise
Price
(per share)
 
Aggregate
Intrinsic
Value (1)
 
Number of
Shares
Exercisable
 
Weighted-Average
Contractual
Term (years)
Balance at January 27, 2019
877

 
$
29.03

 
$
18,226

 
472
 
 
Granted
—

 
—

 
 
 
 
 
 
Exercised
(242
)
 
25.22

 
5,877

 
 
 
 
Forfeited
(11
)
 
41.71

 
 
 
 
 
 
Balance at January 26, 2020
624

 
$
30.26

 
$
13,895

 
428
 
 
Exercisable at January 26, 2020
428

 
$
25.26

 
$
11,661

 
 
 
2.1
Vested and expected to vest after January 26, 2020
624

 
$
30.26

 
$
13,895

 
 
 
2.7

(1) The aggregate intrinsic value of stock options vested and exercisable and vested and expected to vest as of January 26, 2020 is calculated based on the difference between the exercise price and the $52.52 closing price of the Company's common stock as of January 26, 2020.
The aggregate unrecognized compensation expense for the outstanding stock options as of January 26, 2020 was $1.9 million, which will be recognized over a weighted-average period of 2.2 years.
The following table summarizes information regarding unvested stock option awards at January 26, 2020:
(in thousands, except per share data)
Number
of
Shares
 
Weighted-Average
Exercise Price
(per share)
 
Weighted-Average
Grant Date
Fair Value
(per share)
Balance at January 27, 2019
400

 
$
34.52

  
$
10.07

Granted
—

 
—

  
—

Vested
(193
)
 
27.40

  
7.86

Forfeited
(11
)
 
42.44

  
12.50

Balance at January 26, 2020
196

 
$
41.14

  
$
12.13


Market Condition Restricted Stock Units
In fiscal years 2020, 2019 and 2018, the Company granted, 266,000, 200,442 and 215,857, respectively, of restricted stock units to certain executives of the Company that have a pre-defined market condition that determines the number of shares that ultimately vest and a service condition that are accounted for as equity awards (the "TSR Awards"). The market condition is determined based upon the Company’s total stockholder return ("TSR") benchmarked against the TSR of the S&P SPDR
Semiconductor ETF (NYSE:XSD) over a one, two, three, and some cases four-year period. Award recipients must be employed for the entire service period and be an active employee at the time of vesting. The Company uses a Monte Carlo simulation to determine the grant-date fair value for the TSR Awards, which takes into consideration the possible outcomes pertaining to the TSR market condition. The estimated fair market values for each tranche of the TSR Awards granted in fiscal year 2020 were $55.82, $59.36, $61.45 and $62.98 for the one-year, two-year, three-year and four-year vesting periods, respectively.
The following table summarizes the activity for TSR Awards for fiscal year 2020:
(in thousands, except per share data)
Total
Units
 
Weighted-Average
Grant Date Fair Value
(per share)
Balance at January 27, 2019
203

 
$
37.51

Granted
266

 
59.49

Vested
(79
)
 
36.30

Cancelled/Forfeited (1)
(133
)
 
48.94

Balance at January 26, 2020
257

 
$
54.61


(1) Represents cancellations due to awards vesting below the TSR target
Amounts in the table above include the stated number of awards granted and outstanding. However, the number of awards that ultimately vest may be higher or lower than the originally granted amounts depending upon the actual TSR achievement level over the performance period. For example, of the 214,100 awards scheduled to vest on January 26, 2020, only 79,245 actually vested due to lower than target TSR achievement levels.
The aggregate unrecognized compensation expense for TSR Awards as of January 26, 2020, was $8.4 million, which will be recognized over a weighted-average period of 1.6 years.
During the fourth quarter of fiscal year 2020, management identified certain immaterial errors related to share-based compensation expense of market-based awards granted during fiscal years 2018, 2019 and 2020. We concluded that the impact of the errors was not material and have corrected our consolidated financial statements and all other financial information presented in this Annual Report on Form 10-K for these errors. Refer to Note 20 for a discussion of the Company's assessment of the errors and impact on its consolidated financial statements.
CEO Market Condition Restricted Stock Units
On March 5, 2019, the Company granted its Chief Executive Officer ("CEO") 320,000 restricted stock units with a market condition. The award is eligible to vest during the period commencing March 5, 2019, and ending March 5, 2024 (the "Performance Period") as follows: 30% of the restricted stock units covered by the award will vest if, during any consecutive 30 day trading period that commences and ends during the Performance Period, the average per-share closing price of the Company’s common stock equals or exceeds $71.00 ("Tranche 1") and the award will vest in full if, during any consecutive 30 day trading period that commences and ends during the Performance Period, the average per-share closing price of the Company’s common stock equals or exceeds $95.00 ("Tranche 2"). The award will also vest as to 30% if a majority change in control of the Company occurs during the Performance Period and, in connection with such event, the Company’s stockholders become entitled to receive per-share consideration having a value equal to or greater than $71.00 but less than $95.00. If the Change in Control Per-Share Consideration is equal to or greater than $95.00 the award will fully vest. The fair value of Tranche 1 and Tranche 2 at the grant date was determined to be $44.32 and $33.19, respectively, by application of the Monte Carlo simulation model. The aggregate unrecognized compensation expense for the CEO market condition RSU award as of January 26, 2020 was $4.8 million, which will be recognized over a weighted-average period of 1.1 years.
Restricted Stock Units, Employees
The Company grants restricted stock units to certain employees, which are expected to be settled with shares of the Company's common stock. The grant date for these awards is equal to the measurement date. These awards are valued as of the measurement date, based on the fair value of the Company's common stock at the grant date, and recognized as share-based compensation expense over the requisite vesting period (typically 4 years).
The following table is a summary of the status of non-vested restricted stock unit awards as of January 26, 2020, and changes during the year.
 
Restricted Stock Units, Stock Grants and Stock Units
(in thousands, except per share data)
Shares
 
Weighted-Average
Grant Date Fair Value
(per share)
Nonvested at January 27, 2019
2,204

 
$
36.62

Granted
921

 
47.88

Vested
(892
)
 
31.62

Forfeited
(131
)
 
40.55

Nonvested at January 26, 2020
2,102

 
$
43.43


The aggregate unrecognized compensation for the non-vested restricted stock units as of January 26, 2020 was $71.8 million, which will be recognized over a weighted-average period of 2.4 years.
Restricted Stock Units, Non-Employee Directors
The Company maintains a compensation program pursuant to which restricted stock units are granted to the Company’s directors that are not employed by the Company or any of its subsidiaries. Under the Company's director compensation program, a portion of the stock units granted under the program would be settled in cash and a portion would be settled in shares of the Company's common stock. Restricted stock units awarded under the program are scheduled to vest on the earlier of (i) one year after the grant date or (ii) the day immediately preceding the annual meeting of stockholders in the year following the grant. The portion of a restricted stock unit award under the program that is to be settled in cash will, subject to vesting, be settled when the director who received the award separates from the board of directors. The portion of a restricted stock unit award under the program that is to be settled in shares of stock will, subject to vesting, be settled promptly following vesting. There were no changes to the terms and conditions of the existing awards.
The restricted stock units that are to be settled in cash are accounted for as liabilities. These awards are not typically settled until a non-employee director’s separation from service, so the value of both the unvested and vested but unsettled awards are re-measured at the end of each reporting period until settlement. As of January 26, 2020, the total number of vested, but unsettled awards was 190,873 units, and $10.5 million of the liability associated with these awards was included in "Other long-term liabilities" in the Balance Sheets.
The restricted stock units that are to be settled in shares are accounted for as equity. The grant date for these awards is equal to the measurement date. These awards are valued as of the measurement date, based on the fair value of the Company's common stock at the grant date, and recognized as share-based compensation expense over the requisite vesting period (typically one year).
The following table summarizes the activity for the non-employee directors restricted stock units for the fiscal year ended January 26, 2020:
(in thousands, except per share data)
Total
Units
 
Units Subject to Share Settlement
 
Units Subject to Cash Settlement
 
Weighted-Average
Grant Date
Fair Value
(per share)
Balance at January 27, 2019
26

 
12

 
14

 
$
48.84

Granted
26

 
12

 
14

 
50.55

Vested
(26
)
 
(12
)
 
(14
)
 
48.84

Forfeited
—

 
—

 
—

 
—

Balance at January 26, 2020
26

 
12

 
14

 
$
50.55


Performance-Based Restricted Stock Units
Prior to fiscal year 2018, the Company granted performance-based restricted stock units to select employees. These awards had a performance condition in addition to a service condition. The performance metrics were based on a pre-defined cumulative three-year performance of the Company’s revenue and non-GAAP operating income measured against internal goals. For these awards, the performance was tied to the Company’s performance in the grant year and the succeeding two fiscal years. The performance award recipients must be employed for the entire three-year period, which is the explicit service and requisite service period, and be an active employee at the time of vesting of the awards (cliff vesting at the end of the third year). At January 27, 2019, the performance metrics associated with the remaining outstanding awards, which were issued in fiscal year 2017, were met at a level which resulted in a grant that vested at 180.8% of target. Under the terms of these awards, 187,116
shares were settled in shares and 187,116 shares were settled in cash, in the amount of $9.3 million, during fiscal year 2020. There are no remaining awards outstanding as of January 26, 2020.
Award Modifications
In the first quarter of fiscal year 2019, the Company modified the terms of 159,000 fully vested shares held by 8 employees. As a result of the modification, additional compensation cost of $2.8 million was recognized during the first quarter of fiscal year 2019.
Warrant
On October 5, 2016, the Company issued a warrant (the "Warrant") to Comcast Cable Communications Management LLC ("Comcast") to purchase up to 1,086,957 shares (the "Warrant Shares") of the common stock of Semtech Corporation. The Warrant was issued by the Company to Comcast in connection with an agreement between the parties regarding the intended trial deployment by Comcast of a low-power wide-area network in the U.S., based on the Company’s LoRa® devices and wireless radio frequency technology. The Warrant was accounted for as equity and the cost was recognized as an offset to net sales over the respective performance period. The Warrant consisted of five performance tranches. The cost associated with each tranche had been recognized based on the fair value at each reporting date until vesting, which was the measurement date. On April 27, 2018, the Company accelerated the vesting of the remaining 586,956 unvested shares from the Warrant ("Acceleration Event"), resulting in the full recognition of the remaining costs to be recognized for the Warrant. For the fiscal year ended January 27, 2019, the net sales offset reflects the cost associated with the Warrant of $21.5 million, including $15.9 million related to the Acceleration Event. As of January 27, 2019, the Warrant was fully vested and exercisable for a total of 869,565 shares, with no additional costs to be recognized in future periods. The Warrant was fully exercised and no longer outstanding as of March 15, 2019.